Handling the Amazon Pullback

Amazon (AMZN) has seen a healthy pullback recently, so here's the question: Is this a buying opportunity, or is a more important high now in place for the stock?

The good news is that we don't need to know the answer to that question in order to potentially profit from a trade in this stock. All we need is a trade setup, followed by a trigger that tells us it's worth placing an educated bet on the buy side. Let's talk about two trade-setup zones that I am currently stalking in Amazon. If this is a buying opportunity, ideally I'll want to see the price hold somewhere above the Nov. 15 low on a pullback. Those two zones both come in above that prior low.

The first area comes in at the $240.64-to-$242.59 area. It includes a 50% retracement of one swing, the Nov. 15 low to the Dec. 18 high; a 1.272 Fibonacci extension of the Dec. 11 low to the Dec. 18 high; and a 100% projection of a prior decline of $20.53 -- from the Oct. 26 high to the Nov. 15 low -- projected from the Dec. 18 high. Note that the current decline, from the Dec .18 high, is currently similar to that $20.25 decline (illustrated on the chart above).

The second zone comes in at $235.34 to $238.61. This includes the 0.618 retracement of the Nov. 15 low to the Dec. 18 high, a 1.618 extension of the Dec. 11 low to the Dec. 18 high, as well as three 100% projections of some prior larger declines. These are also illustrated on the daily chart. Note that these prior declines came to $24.50, 26.20 and $27.47. I include these projections because I've found that many moves in a market can be similar and sometimes even equal, so these projections are definitely worth watching!

So now that we have a couple of setup zones, and we see the stock is essentially testing zone 1, let's look at what we would need to see on a 30-minute chart before we should place a bet on the buy side.

For me to consider a buy entry, I'll need to see an upside crossover between the eight- and 34-day exponential moving averages, and I'd the price to take out a prior swing high on the same chart. While both of these need to occur, it does not matter which happens first. At the moment, you can see that the eight-bar EMA is still below the 34-day EMA on the above chart. We are also still looking at a pattern of lower lows and highs.

Bottom line: I am keeping an eye on both of the above support decisions, along with my 30-minute chart, as I wait to see if the buy side will be triggered in the coming sessions against one of these key zones. If we see a buy trigger, the maximum risk should be defined below the low end of the second price cluster zone at the $235-to-$238 area. If this setup does start to play out, the upside potential comes in at the $276 area. There will be other targets I can post, as well, once a key low is defined.

If these same key zones are violated instead, I back off the buy side until further notice.